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Thursday, 2 November 2017

TOKYO (Reuters) - Asian shares inched higher on Thursday after the U.S. Federal Reserve said economic growth was solid, virtually cementing the case for a December rate rise even as investors braced for what is expected to be the Bank of England’s first hike in more than 10 years.

Futures hinted at weaker openings for European bourses, with European stock futures down 0.2 percent while Dax futures FDXc1 and FTSE futures FFIc1 each shed 0.3 percent. CAC futures FCEc1 down 0.1 percent.

Investors were wary as they awaited the nomination of the next head of the U.S. central bank, as well as a tax bill from squabbling Republicans in the U.S. House of Representatives. Both were expected later in the session.

After a one-day delay, the tax plan is said to include $6 trillion in tax cuts over 10 years but is unlikely to define how these would be offset as Republicans remain split over how to pay for them.

The BoE is expected to raise rates later in the session (1200 GMT) to tamp down inflation, which has picked up to a five-year high despite weakening economic growth.

But most economists polled by Reuters say a rate hike now would be a mistake as uncertainty builds ahead of Britain’s planned departure from the EU in March 2019.

Sterling firmed 0.2 percent to $1.3282 ahead of the decision.

MSCI’s broadest index of Asia-Pacific shares outside Japan was nearly flat in late afternoon trade, after earlier climbing to its highest levels since November 2007.

Australian shares touched a two-and-a-half year high in early trade but reversed gains to close down 0.1 percent.

Japan's Nikkei stock index .N225 finished up 0.5 percent at its highest close since late June 1996, gaining 2.4 percent in a holiday-shortened week. Japanese markets will be closed for a national holiday on Friday.

U.S. S&P e-mini futures were down 0.2 percent.

“There is some element of uncertainty about the U.S. tax bill and next Fed chief, and this is having an effect on the U.S. market, though shares in Asia appear quite resilient today,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust.

“Still, it would not be surprising if some investors used the uncertainty as a reason to take profits after recent strong gains,” she said.

The White House plans to nominate current Fed Governor Jerome Powell as the next chair when Janet Yellen’s term expires in February, a source familiar with the matter said on Wednesday.

Powell’s nomination, which would need to be confirmed by the Senate, is expected later on Thursday before President Donald Trump leaves on a trip to Asia.

Rising expectations that Trump will tap Powell, who is seen as more dovish on interest rates, have pressured U.S. Treasury yields and kept the dollar on the backfoot this week.

On Wednesday, Wall Street posted modest gains after the Fed held policy steady as expected and underscored solid U.S. economic growth as well as a strengthening labour market, while downplaying the impact of recent hurricanes.

Investors took that as a sign the U.S. central bank is on track to resume raising rates next month, with federal fund futures putting the odds of a December rate hike at about 98 percent, according to CME Group’s FedWatch program.

In addition to the Fed’s encouraging assessment, the ADP National Employment Report showed that private employers hired 235,000 workers in October, the most in seven months.

On Friday, the Labor Department’s nonfarm payrolls report is expected to show growth of 303,000 jobs in October, compared to a drop of 40,000 the month before. Total non-farm employment is expected to have increased by 312,000, according to economists polled by Reuters.

U.S. Treasury yields fell further on Wednesday and the yield curve was its flattest since 2007 after the Treasury Department said it would keep auction sizes steady in the coming months, despite the Fed’s plan to reduce its bond holdings.

Benchmark 10-year note yields were at 2.359 percent in Asian trading, compared to their U.S. close of 2.376 percent on Wednesday, when they dipped as low as 2.349 percent.

The dollar index, which tracks the greenback against a basket of six major rivals, slipped 0.3 percent to 94.533

The dollar pulled back 0.3 percent against the yen to 113.89, moving away from its more than three-month high of 114.45 yen touched last Friday.

The euro was 0.3 percent higher at $1.1655, remaining about its three-month low of $1.1574 touched on Friday, a day after the ECB said it will extend its bond purchases into September 2018.

Crude oil futures steadied, with Brent crude up 7 cents at $60.56 per barrel and U.S. crude down 1 cent at $54.29.

While oil settled lower on Wednesday after weekly U.S. government inventory data showed the latest crude stock draw was not as big as an industry trade group had reported, both Brent and U.S. crude futures remain near their highest levels since July 2015 as lower global supply pushed markets higher.